HIGHER COLLEGES OF TECHNOLOGY-ADWCGroup PROJECT COVER SHEET [35%]
Course Code and Name ACC4053(Advanced Financial Accounting ) Faculty NameProject TitleDue Date Week 15Student Name Date SubmittedStudent ID Section
This assessment will address the following Learning outcomes:CLO 3: Analyze disclosures in financial statements and discuss the limitations of balance sheets and issues of income statement contentCLO 4: Prepare and explain consolidated financial statements for business combinations
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For Examiner’s Use OnlySection number Case 1Case 2Case 3Case 4
TotalMarks Available 10 15 12.5 12.5 50Marks Earned
Marker Name Date
Case 1: Related party transaction disclosure (10 Marks)a) What is the definition of related party? Give examples of related parties?b) What are the common types of transactions that can be conducted between related parties?c) What are the related parties’ disclosure requirements?
Case 2: Interim Reporting disclosure (15 Marks)What is the meaning, objectives, difficulties and suggestions for improvement of interim reports?
Case 3 (12.5 marks)Objectives:Prepare consolidated financial statements subsequent to acquisition when parent has applied the equity method, initial value method and the partial equity method and preparing worksheet entries to consolidate the financial recordsRecognize the complexities in preparing consolidated financial reports emerging from the passage of time, Identify the methods available for a parent company to maintain its investment in subsidiary accounts
On January 1, 2020, ALPHA Company acquired all of BETA Company’s outstanding common stock for $1,263,000 in cash. As of that date, one of BETA’s buildings with a 12-year remaining life was undervalued on its financial records by $108,000. Equipment with a 10-year life was undervalued, but only by $15,000. The book values of all of BETA’s other assets and liabilities were equal to their fair values at that time except for an unrecorded licensing agreement with an assessed value of $60,000 and a 20-year remaining useful life. BETA’s book value at the acquisition date was $1,080,000. During 2018, BETA reported net income of $150,000 and paid $45,000 in dividends. Earnings were $180,000 in 2019 with $45,000 in dividends distributed by the subsidiary. As of December 31, 2020, the companies reported the following selected balances, which include all revenues and expenses for the year:
ALPHA CompanyDecember 31, 2020 BETA CompanyDecember 31, 2020Debit Credit Debit CreditBuildings 2,310,000 690,000Cash and receivables 75,000 135,000Common stock 1,350,000 600,000Dividends paid 105,000 15,000Equipment 420,000 300,000Cost of goods sold 750,000 180,000Depreciation expense 150,000 90,000Inventory 420,000 390,000Land 495,000 375,000Liabilities 720,000 390,000Retained earnings 2,040,000 735,000Revenues 1,350,000 450,000Required1. If ALPHA applies the equity method, what is its investment account balance as of December 31, 2020?2. If ALPHA applies the initial value method, what is its investment account balance as of December 31, 2020?3. If ALPHA applies the partial equity method, what is its investment account balance as of December 31, 2020?4. Regardless of the accounting method in use by ALPHA, what are the consolidated totals as of December 31, 2020, for each of the following accounts? Buildings Equipment Land Depreciation Expense Amortization Expense Revenue Net Income Investment in BETA Dividend paid Cost of Goods Sold5. Prepare the worksheet entries required on December 31, 2020, to consolidate the financial records of these two companies. Assume that ALPHA applied the equity method to its investment account.6. How would the worksheet entries in requirement (d) be altered if ALPHA has used the initial value method?
Case 4: (12.5 marks)Objective:Understand that a parent’s internal accounting method for its subsidiary investments has no effect on the consolidated financial statement
Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $510,000 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $440,000. Credit balances are indicated by parentheses.
Adams ClayCurrent assets $ 300,000 $ 220,000Investment in Clay 510,000 0Equipment 600,000 390,000Liabilities (200,000) (160,000)Common stock (350,000) (150,000)Retained earnings, 1/1/17 (860,000) (300,000)________________________________________
In 2017, Clay earns a net income of $55,000 and declares and pays a $5,000 cash dividend. In 2017, Adams reports net income from its own operations (exclusive of any income from Clay) of $125,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows:
Adams ClayRevenues $ (400,000 ) $ (240,000 )Expenses 290,000 180,000Investment income Not given 0Retained earnings, 1/1/18 Not given (350,000 )Dividends declared 0 8,000Common stock (350,000 ) (150,000 )Current assets 580,000 262,000Investment in Clay Not given 0Equipment 520,000 420,000Liabilities (152,000 ) (130,000 )________________________________________
a. What are the December 31, 2018, Investment Income and Investment in Clay account balances assuming Adams uses the:• Equity method.• Initial value method.b. How does the parent’s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2018, consolidated income statement?c. How does the parent’s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2018, consolidated balance sheet?d. What is Adams’s January 1, 2018, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:• Equity value method.• Initial value method.e. What worksheet adjustment to Adams’s January 1, 2018, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?f. Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.g. What is consolidated net income for 2018?
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